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A quick recovery from economic downturn appears unlikely

Health concerns still dominates the story of the novel coronavirus, but the economic impacts of the resultant lockdown are more than a passing consideration. And we’re already looking beyond the crisis to the life-after phase.

So much remains unknown, however. We don’t have a handle on COVID-19, let alone the complicated web of events that emerged from the virus and the political decision to issue stay-at-home orders. The economic collapse that followed wasn’t a surprise, though there was no precedent to give us an idea what would happen, and even less information to go on when trying to predict when and how the economy will recover.

Nobody creating an economic model of a sudden shuttering of most businesses and the ensuing job losses would have predicted there’d be a real-world example to study. Economists are now awash in data that will undoubtedly be studied for years to come. Right now, they’re trying to make sense of the numbers, and perhaps formulating a few predictions about what happens next.

Economists can draw on past recessions to make some educated guesses about what this recovery will look like, but there’s a caveat: this downturn is self-imposed. Where past recessions could be traced to issues in the economy – the corruption of the financial services industry that lead to a housing crash in 2008, for instance – this time it’s about governments forcing businesses to close in order to slow the spread of a virus. But there’s no simple on/off switch in the economy.

For University of Waterloo economics professor Joel Blit, theories about what might occur are likely to be different in practice. Last week’s latest numbers from Statistics Canada’s Labour Force Survey have provided reams of data to help get a handle on the reality of the situation.

“A lot of people are hoping for a V-shaped recovery, and the fact that … there was, in theory, nothing fundamentally wrong with the economy to begin with, we might be able to just sort of open back up and go right back to it,” he says. “The Labour Force Survey does show that there are a lot of people who lost their jobs, but they’re temporarily laid off. So, in theory, they expect to be going right back to work. In theory. In practice, what’s going to happen? I have no idea.”

Fellow UW economics professor Mikal Skuterud is also skeptical about a quick recovery to match the quick downturn.

“I find it hard to believe when talking to people talking about a V-shaped recession that we’re just going to come right back to where we were. I just can’t possibly imagine that – there are so many adjustments being made on labour supply and the demand side, that I just can’t see that right now.”

What we do know is that unemployment numbers jumped dramatically in April. The Stats Can figures from last week show the unemployment rate rose 5.2 percentage points in April to 13 per cent. That spike came on the heels of an increase of 2.2 percentage points in March. Since stats were first tracked in 1976, April’s unemployment rate was second only to the 13.1 per cent in December 1982.

Worse still, the agency notes the current rate would be 17.8 per cent if adjusted to reflect those who were not counted as unemployed for reasons specific to the COVID-19 economic shutdown. During the week of April 12, 1.1 million people were not in the labour force but had worked recently and wanted to work. They were not counted as unemployed but were counted as not in the labour force because they did not look for work, with Stats Can attributing that to ongoing business closures and very limited opportunities to find new work.

Even with governments easing some restrictions in a gradual effort to reopen economies, the unknowns remain a large barrier to recovery.

“There’s still going to be a lot of uncertainty. So there’s going to be uncertainty around whether there’s going to be a second wave. A third wave, there’s going to be uncertainty around whether it’ll be a future virus. There’s going to be uncertainty around how quickly consumer spending is going to recover. If you’re a firm, there’s going to be uncertainty around what governments are going to do and whether they will try and pay down the massive debt that they’ve incurred quickly or whether they’ll try and do it over a very long run. I just think there’s a massive amount of uncertainty all around. And so what does that mean for firms? It means that you’re probably not going to invest until you sort of know what’s on the horizon,” says Blit.

A labour economist, Skuterud notes that while the current downturn has many of the hallmarks of a traditional demand-side recession – simply put, a weakened economy sees consumer spending drop, leading to job losses that, in turn, drops consumer spending, and so on – there’s also the coronavirus to take into account. Simply opening up the economy doesn’t solve our health fears.

“There are health considerations. We get caught up talking about the economy and we forget that there’s this virus out there. That’s something out there. It’s not just government’s imposing this (lockdown, reopening) to some extent. You could open up the economy and still not [get] a response, because people don’t want to go back to work. They don’t feel safe,” explains Skuterud.

Economics, at heart the study of human behaviour, has no precedent for a lockdown on this scale, nor for determining how we’ll react to reopening attempts with health threats still lingering, and likely to continue hanging around until there’s an effective vaccine. Until then, we’re all guinea pigs in a real-time experiment.

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